WEAKNESSES

Very dependent on European demand: 63% of exports are to the Eurozone, one third to Germany

Automotive occupy large share of the economy

Lack of rapid transport links with the rest of Europe

Ageing population and shortage of skilled labour

RISK ASSESSMENT

Dynamic activity despite an economic slowdown

Following the outstanding performance of 2017 associated with the recovery of investment, growth in 2018 is expected to settle at a level in line with potential but will remain hampered by the shortage of a local workforce due to low unemployment (2.7% in October 2017). Private investment will continue to be the second most important contributor to growth, after private consumption, because of the high capacity utilisation ratio. Construction will continue to benefit from the return to normal of European structural finance, but will be hampered by the residential property downturn. This will suffer from more expensive credit linked to the central bank’s monetary policy tightening. Automotive – which accounts for 28% of industrial production, 20% of exports of goods, and 10% of GDP – is expected to continue to prosper. This is because automotive exports will benefit from strong German consumption and performance, as well as the positive trend on the European market on which they greatly rely. Nonetheless, export momentum will be dampened by the appreciation of the koruna, reducing export competitiveness and trade’s contribution to growth. Inflationary tensions will start to put pressure on household consumption. Nevertheless, household consumption will continue to be underpinned by robust employment figures and wages, as well as by the gradual appreciation of the krona, enabling a reduction in the cost of imported goods.

Excellent fiscal position and satisfactory external accounts

Despite some easing, the new government’s fiscal policy is expected to remain cautious, helping keep the public accounts in equilibrium in 2018. Infrastructure spending will increase due to the necessity of using European funds awarded under the 2014-2020 programme, on pain of seeing the level reduced in future. Moreover, massive fiscal reforms are planned by the new government, which wants to take advantage of the strong increase in revenues generated by the lively pace of activity to finance the reforms without worsening the budget position. The reforms include a cut in VAT in the hospitality sector (from 21% to 15%), a reduction in employer contributions, as well as cuts to income and corporation tax. The reform programme will also be financed by cuts to current spending, allowing budget equilibrium to be maintained and debt reduction to continue. Despite the influx of foreign capital attracted by prospects for an appreciation of the koruna, 80% of the debt is still held by local investors. This success explains why 86% is denominated in koruna and issued at negative yields on short maturities.

The trade balance shows a structural surplus (5.6% of GDP in 2016) thanks to close integration in the European, especially German, production chain and for automotive. Engineering, household appliances and electrical equipment will also make a positive contribution. Nevertheless, the slight appreciation of the koruna, as well as robust domestic demand, will limit the trade surplus. Services also show a surplus (2.3%) thanks to tourism. The substantial income deficit (6.1%) is explained by the substantial FDI stock. This results in a small current account surplus, which could be jeopardised by a drop in the trade surplus, even if the potential for deterioration seems fairly limited. Moreover, external debt (74% of GDP) presents a low risk, as it mostly consists of intragroup liabilities, loans linked to FDIs, short-term commercial loans, and deposits by foreign banks with their local subsidiaries (87% of bank assets), which are by nature fairly fixed.

Formation of a minority government, weakened by allegations concerning the new Prime Minister

The ANO 2011 (centre-right) movement led by Andrej Babis, won the October 2017 elections by a large margin, obtaining 30% of the votes cast and 78 out 200 seats in parliament. Nevertheless, the traditional parties have refused to enter into a coalition with this party whose leader has been charged with the fraudulent use of European funds. The traditional parties received a historically low share of the votes, for example the Social Democratic Party (CSSD), to which the outgoing Prime Minister belongs, was relegated to sixth place with only 7% of the votes. Conversely, the rival parties have made significant progress with the Czech Pirate Party (10.8%) and the extreme-right Freedom and Direct Democracy Party (10.6%) able to profit from distrust of migrants and Euroscepticism. With nine parties represented, the fragmented parliament makes it difficult to form a majority government. Therefore, Andrej Babis will lead a minority government and will have his work cut out to win the parliamentary vote of confidence. He could win the vote if the far-right and far-left parties, which have given him their tacit support at the price of major concessions, were to abstain. If he fails, another less controversial member of his party could take over in order to reassure the traditional parties.

Last update : January 2018

Payment

Czech law limits cash payments to a maximum of CZK 270,000 (approximately EUR 10,000). Purchasers who wish to make payments that exceed this limit must pay the entire sum via wire/bank transfer.

Bank transfers are by far the most widely-used means of payment. The SWIFT system is fully operable in the Czech Republic, and provides an easier, quicker and cheaper method for handling international payments. The Czech Republic is part of the SEPA system, simplifying bank transfers inside the European region.

Cheques for domestic transactions are not widely used. Bills of exchange and promissory notes are commonly used as a security instrument, which present the purchaser with the option to access a fast-track procedure for ordering payment by court (under certain legal conditions).

Electronic invoices are widely accepted.

Debt collection

To ensure the recovery of a debt in case of default, creditors should keep all documentation related to the transaction. This includes the original (written) contract, any documents related to the transaction (e.g. invoices and confirmed delivery notes, such as internal delivery notes, CMRs , CIMs, bill of lading, airway bills, packing lists, etc.), individual orders, and any other relevant documentation and/or correspondence.

The main factors influencing effectiveness in debt collection are the age of the debt (the earlier the start of collection, the larger the chance for a successful recovery) and the reason for non-payment.

The more typical reasons for non-payment, with their associated probability of successfully settling the debt, are as follows:

Amicable debt collection is recommended, because it remains cheaper for creditor compared to legal proceedings. Amicable settlements are also enforceable in court.

Legal proceedings

The costliness and length of average legal proceedings is comparable to European standards.

Average court costs total 20 to 25% of the nominal value and include:

A court fee of 5% and a minimum value of CZK 1,000

This is reduced to 4% and a minimum of CZK 400 when the plaintiff applies for an electronic payment order,

Lawyers’ fees of (approximately) 15%

Other costs and other costs of (approximately) 3%

e.g. expert testimony, translation and interpretation

Fast-track procedure / Order to pay (platební rozkaz)

This is a practical and rather short procedure, outlined in sections 172 - 175 of the Code of Civil Procedure (občanský soudní řád, CCP).

The judge, convinced of the merits of the claim and without hearing the case, issues a payment order which is served to the defendant, who may either accept it or file a statement of opposition against it within fifteen days of its service.

If the debtor opposes the debt, then the process continues as standard court proceedings.

If the legal action duly described and substantiated the creditor’s claim, the court can issue an order to pay, even if the creditor has not requested such an order. It takes on average three months for a decision to be made, ranging from a minimum of two months to a maximum of six months.

Ordinary procedure

Ordinary proceedings takes place after the defendant has disputed the claim during the platební rozkaz or by filing a dispute directly via the courts. Ordinary proceedings are partly in writing (parties filing submissions accompanied by all supporting case documents), and partly oral (both creditors and debtors present their cases during the main hearing). In practice, ordinary proceedings typically last from one to three years before the court renders a final and enforceable judgement.

On the 1st July 2009 onwards (Act No. 7/2009 Coll.), the CCP was amended to introduce more digital options in the justice process, so as to lessen the burden of judges and ensure the prevention of delays in proceedings. Since this amendment, all correspondence from Czech authorities to legal entities is delivered electronically via registered data boxes with special legal regulations (Act No. 300/2008 Coll., effective as of 1st July 2009).

Enforcement of a Judgement

Judicial enforcement is reserved only for matters specifically listed in the law, such as family law. All monetary claims stemming from business relationships are enforced by a judicial executor (soudní executor) under Act No. 120/2001 Coll. (exekuční řád, the Execution Act).

Enforcement by judicial executor is considered to be more effective, because the executor is a private-sector entity whose fees depend on a successful enforcement. A specific fees schedule applies based on the amount concerned by the execution.

As part of the European Union, enforcement of foreign awards issued by a European Union member state will benefit from advantageous enforcement conditions, such as the EU Payment Order or the European Small Claims procedure. Foreign awards rendered by non-EU countries can be recognized and enforced, provided that they have gone through the exequatur procedure under the Czech Private International Law and Procedure Act.

Insolvency proceedings

The insolvency act introduces new methods and faster process, with single proceedings where the court decides on three particular solutions:

Reorganisation

Bankruptcy

Debt clearance (or in other words, discharge of debts)

An insolvency petition can be lodged by either debtors themselves or their creditors, but a creditor must provide unambiguous evidence to support its claim, with one of the following:

An acknowledgement of debt (with the certified signature of the debtor or its representative)

An enforceable judgement

An enforceable notary act

An enforceable executor´s act,

Confirmation of auditor or expert witness or tax advisor

The creditor must in addition prove the existence of other creditors. Creditors are liable for damages caused by filing a bankruptcy petition where the conditions of insolvency were not met.

All insolvency petitions are recorded in an insolvency register (insolvenční rejstřík) kept by the Ministry of Justice, where all important information on insolvency proceedings is published (sections 419-425 of the Insolvency Act). This also allows for insolvency proceedings to remain transparent.

Reorganization proceedings

Reorganization is a method of resolving insolvency that aims to preserve the debtor’s business, while granting satisfaction to creditors. Insolvent debtors may initiate proceedings, but debt restructuration proposals must be approved by the court, with periodical inspection of its fulfilment by the creditors. The management retains the right to manage the business.

Bankruptcy proceedings

Bankruptcy is a court-ordered method of resolving insolvency, whose aim is to monetize all assets of debtor and thus obtained yield to distribute between creditors who have lodged their claims into the proceedings. The authorization to dispose of debtor´s assets and to sell those assets is granted to a bankruptcy trustee who is appointed by court. At this point; the business declared bankrupt is no longer allowed to conduct business operations independently.

Debt clearance

Used mainly by individuals (non-entrepreneurs), this is a method of resolving insolvency which presents an alternative to declaring bankruptcy. The Insolvent debtor clears the debt, but under Court control he is obliged to pay only a reduced percentage of total debts.

Liquidation proceedings

The liquidation procedure begins once it is decided that a company is to be wound up. Either the management or the court appoints a liquidator in charge of liquidating the company’s assets and collecting receivables. Creditors must register their claims within 90 days following publication of the court’s decision, in order to get satisfaction during the liquidation proceedings. All claims of creditors must be fully satisfied in liquidation proceedings.

It is important to note that liquidation proceedings are not considered as a method of insolvency in Czech law: in the event that the liquidator finds there are not enough assets to satisfy all claims during liquidation, he is obliged to file a petition for insolvency. At this point, the liquidation turns into insolvency; a separate proceeding.